Case Studies details
Force Majeure ... or Not?
May 1, 2020
Refineries and petrochemical plants on the Gulf Coast have procedures and plans that are put into action when hurricanes threaten. In one particular case, a hurricane was projected to make landfall in a specific Gulf Coast region. As the hurricane moved closer, refineries and petrochemical plants in the area implemented their hurricane preparation plans. The local port authority closed the port and ordered ships to evacuate.
Even with advances in modeling technology, predicting the path of a hurricane is still an inexact science. The hurricane ended up turning and causing minimal damage to the region. Once the port reopened, a ship that had been scheduled to load product on the date of the projected hurricane landfall returned to the refinery that was under contract to deliver the product. The refinery had already declared force majeure on the original load date and now extended the force majeure claim for several more days before the ship was finally loaded. This resulted in an economic loss known as demurrage.
Based on our experience in refinery operations, planning, and scheduling, Baker & O’Brien examined the reasonableness of the force majeure extension. Many factors could have caused the extension. For example, in areas prone to flooding, hurricane preparation procedures sometimes call for filling tanks so flood waters will not float them off their foundations, which will delay product availability. Also, if process units are shut down, it may take several days to produce specification product. On the other hand, force majeure claims typically have a finite period of time following the initial declaration. Therefore, it is prudent for counterparties to ensure that force majeure claims are valid.